The Betterment Experiment – Results

In October 2014, I took my first plunge into automated stock investing, choosing Betterment out of a large and growing field of companies (affectionately referred to as Robo Advisers) that offer similar services.

On this page, I’ll keep you up to date with quarterly results, and we’ll also learn more about how Betterment works, and investing in general.

Show Me The Money!

(results as of February 28, 2019 – including dividend reinvestment and after fees)

The blue line in this handy graph shows the results of my real investment at Betterment. I started with $100,000*, and am allowing them to suck in and auto-invest another $1000 from my bank account every month as well as reinvest all dividends, to simulate a pretty typical scenario.

The orange line is what would have happened if I had followed the same investment pattern with entirely US stocks through Vanguard’s excellent VTI Exchange-traded fund, and the red line is the same scenario if I had bought Vanguard’s “Everything Except the US” fund, which goes by the ticker symbol VXUS.

This should help put the recent market decline into perspective, which has generated a lot of scary headlines in the financial papers involving the words “plunge” and “worst ever”. They make money off of scaring you, there is nothing scary at all about a buy-and-hold index fund investment.

Why do I recommend this?

In one word: Simplicity. OK, maybe we could add a second word to that: Efficiency.

After seven years of writing this blog and hearing from readers of all types, I find that the same question keeps coming up: “What is the single step I can do to get started in investing?”

With no knowledge at all, most people default to keeping their money in a savings account where it will earn them nothing. Others resort to a Wild West financial adviser whose claims and fees exceed his actual financial knowledge. Or speculate in individual stocks and try to time the market. None of these approaches are winners over the long run.

To combat this, I’ve always said “Just buy the Vanguard Total Market Index fund (ticker symbol VTI).” That gives you a near-optimal ownership of hundreds of companies, in single giant, stable, low-fee fund run by an honest company. Over time, this single investment will outperform over 90% of financial advisers and other funds, while letting you sleep well at night.

To improve on VTI, you need to soak up a few more books about investing, general world finance, and asset allocation. And while this has always been my idea of a good time, I have learned that many people have other ideas for their weekends. And even those of us who read these investing books (myself included) often fail to execute the principles properly and consistently.

Betterment combines the (slight) advantages of more advanced investing, with an even simpler experience than you would get with just buying shares of VTI. The worthwhile things they provide, in my opinion, are:

really good tools to show you things like, “how much tax would I owe if I sold these shares right now?”, “how much income would my portfolio generate if I retired right now?”, and other useful visualizations

a very sleek charitable giving system, which makes it easy to donate some of your appreciated shares – giving you a much bigger tax advantage than simply giving cash. More details on this in my 2017 charitable giving article.

In exchange, they charge a fee that is quite a bit lower than the advantage they deliver (and at least 75% less than most financial advisers), so in my view it is a win/win way to invest.

Short-term fluctuations (under 10 years) mean almost nothing.When investing for lifetime wealth, you need to think about longer time periods than you’re used to. It doesn’t matter what your stock does right after you buy it. What matters is the average price as you sell it off in increments much later in life – which could be 20-80 years from now.For example: Imagine that I went back in time to October 14th, but instead of getting started with Betterment, I bought $100,000 of stock in the video game company Electronic Arts (EA). As luck would have it, those shares would have closed out 2014 worth about $143,000. Does that mean EA is a better investment than VTI? No, it’s just more volatile. In fact, if you had bought EA in 2003 and walked away until December 2015, you would have earned zero returns for the entire twelve year period. The company has never even paid a dividend. Individual stocks are a sucker’s bet.

Your fancy new Betterment account contains more than just US stocks – this is a good thing!The Vanguard fund VTI tracks the majority of US stocks. A Betterment porfolio tracks the majority of the developed world’s stocks. From 2014 to 2018, US stocks happened to be on a rampage, while European companies have seen solid earnings but lower stock price multiples. In other words, European stocks have been on sale. So my Betterment portfolio didn’t rise as quickly as the US market. At other times, the reverse happens: US stocks will fall dramatically, while other markets will fall less or even rise. On top of this, international stocks currently pay a much higher dividend yield. For every $100,000 of VTI you own, you’ll get $1780 in annual dividends. For an equal amount of VXUS, you will get $3370, or almost twice as much. In other words, international stocks are priced at a much more attractive level than US stocks, which in my book is a time to buy.

How about that Tax Loss Harvesting?

One of the features of Betterment is that their computers spend all day looking at the stock market while you are off doing other things. Occasionally, this leads to an opportunity to profit from volatility in the market. Selling some of your stuff to lock in a tax-deductible loss, while buying the same stuff through other funds so you remain fully invested.

Since I started this account, I have found that this feature works much better than I had expected. Take a look at this recent snapshot from my account :

Betterment has harvested over $35,000 in deductible “losses” on an account with about $300k of taxable money in it (I have some of my other personal savings in Betterment besides the $116k I have put into the official betterment account, and I can’t separate the reporting).

The value of this is significant: a $35k deduction saves me over $10,000 in income taxes right now, which I can use to buy still more investments. If this $10,000 goes on to earn a conservative 7% ($700/year), it is paying for the fees Betterment charges me (0.25% of $300,000 is about $750 per year). Forever. And that’s just the passive income from the first few years of tax loss harvesting. Then you also get to keep the principal you saved from the loss harvesting.

In other words, in my opinion Betterment costs less than nothing to use due to TLH alone, even before you factor in the benefits of the automatic reallocation, better interface, or other features.

The bottom line is that you save on taxes today but end up with investments which have a lower cost basis. This means you’ll have more taxable gains when you eventually sell them But for many of us, this is years down the road in retirement when we have ditched the full-time salary and thus are in a lower tax bracket.

How this works in practice: So when I file taxes for 2018, I can subtract the $11,355 in short-term capital losses from other gains (such as some shares I sold this year to buy a house), or up to $3000 against ordinary income. Betterment sends you a tax statement that you simply plug into your IRS tax forms, Turbo Tax, or hand to your accountant.

But this is not useful for everyone. For example:

If you are using Betterment for an IRA rather than a taxable account, there is no such thing as Tax Loss Harvesting.

If you are in a low income tax bracket right now, you might not have enough potential tax savings to make it worthwhile

If your income ends up rising even after retirement (as has happened to me and many other early retirees), TLH might be counterproductive if you end up selling these shares into an even higher income stream in the future.

If you have other investments outside of Betterment with similar or identical funds, you might find the IRS disallows Betterment’s harvested losses. I am in this boat, so I need to manually watch for “wash sales” and slightly decrease the deduction I take.

Even with the caveats above, it is a cool enough feature (and profitable for many) that I have enabled it so I’ll be able to report the results on this page.

This experiment is just getting started, so I look forward to years of profits and analysis to come!

Note: To be clear on the background, I did not get paid to write this or any other post, but Betterment does advertise on this site. See the affiliates policy if you’re curious how I handle blog income.

* I chose an allocation of 90% stocks, 10% bonds, which you do by moving a simple slider control on the Betterment website as you set up your account.

Useful Resources:

The price and dividend payment history of VXUS and VTI, which I used to generate the spreadsheet to make the graph above:

I just found this website for the first time and its a real eye opener. The article is excellent. However, Im a bit confused about the allowable annual limits on tax-loss harvesting. I keep reading about a $3000 annual limit but MMM’s article says “a $23k deduction saves me over $7,000 in income taxes right now”. Can someone clarify the rules?

You can take $3,000 as a tax loss on this year’s tax bill against “earned income,” such as wages. So MMM could use only $3k of his $23k to offset earned income. However, he can use all of the losses at once to offset $23k of capital gains the investments may have created over the year (or to offset the sale of a home, stock options, etc). Any capital loses that are not used this year can be carried-forward to future years indefinitely. Effectively you can cash in your losses when it pleases you to do so, which is a handy tool to have in your tax-box.

The $7,000 income tax savings on $23,000 of tax loses indicates a marginal tax rate of 30.4%, which is likely 25% Federal, and 5.4% state. Bankrate shows Colorado as a flat 4.63% tax, but perhaps there is a local tax thrown on top. In Maryland where I live, the state tax is usually between 8-9%, so tax savings are a huge deal for getting your fair share of your earnings.

To clarify a bit more on the above, the $7k tax refund must be computed based on “earned income,” and so will need to be spread over a number of years to get that tax-benefit. If exercised in a single year (this year for instance), a $23,000 tax loss will lower only $3,000 of income ($930 tax refund), and $20,000 of capital gains at 15% Fed and 4.6% state (savings of $3,920 in capital gains taxes this year). So really a $23,000 tax loss can only amount to a bit less than $5,000 in tax savings this year. The only way it will be more is if he is in the 20% capital gains bracket (and add the ACA penalty), or that these are short-term capital gains, which are taxed at ordinary rates.

Hi everyone and MMM! I’ve been spending the last year or so reading your blog from start to finish and am loving it.

There is probably a simple explanation to this that I can’t see yet, but how is Betterment better than just buying VTI? I ask, because it looks like you would have made an extra $10,000 if you had just invested in VTI, and you’d only have the one fee from the index fund to pay. With Betterment, you’re paying for their services plus the fees from whatever indexes they invest in, no?

What is holding you back from placing your entire nest egg in Betterment? Managing the wash sale rule, while also trying to diversify your assets outside of Betterment seems unnecessary if you believe in the Betterment approach and see a net benefit (eliminating time associated with DCA across ETFs every month, TLH, one-stop shop).

Struggling myself whether to put all my eggs in one basket, and seems like it should be an all or nothing approach. Thoughts?

Hi MMM, thanks so much for the great blog and your insights. In the post you mention: “If you have other investments outside of Betterment with similar or identical funds, you might find the IRS disallows Betterment’s harvested losses. I am in this boat, so I need to manually watch for “wash sales” and slightly decrease the deduction I take.”

I have a Fidelity 401k with biweekly contributions at my company and am considering opening a Betterment account for additional taxable investment money + my rollover 401k from previous employer. In the Fidelity account, I plan to have a mix of iShares Blackrock index funds, so I need to watch for a wash sale if I have TLH turned on with Betterment. I was just wondering about the mechanics of how you manually watch for wash sales and determine the amount to decrease your tax deduction, as mentioned above? For example, is there a statement you review at the end of the year from Betterment that allows you determine this easily? I’d like to utilize TLH, but other than using target date funds in my Fidelity account (which seems suboptimal), I’m not sure how to manually keep an eye out for a wash sale.

I’m curious if you still like Betterment for Roboadvisor? I have an account there but was also looking at the Schwab offering. I like the tax loss Harvesting I get at Betterment and am wondering if their is a way to compare the two?

So I finally finished reading this whole post and WOW, ton of information. For a little background I am 25 years old making about 75,000 per a year. My company does not match 401k so I just decided to open up a ROTH IRA with Scottrade. I wanted to invest in dividend paying stocks and spent the 5,500 (max to contribute per year) in dividend paying stocks.

After reading all these posts I feel I might have messed up using Scottrade for Roth IRA instead of Vanguard and
their index funds to pretty much let it ride until retirement.

Now my question is, should I switch brokerages and create a Roth IRA with Vanguard? Then create a individual brokerage with Scottrade where I can “play” with my money a little bit more buying different stocks, and be able to take it out when buying my first house and other expenses?

You can have as many IRA accounts as you like, as long as the annual contributions taken together add up to $5,500 or less. Go ahead and setup an account with Vanguard, but wait until next year to put money into it. I would keep your Scottrade account as-is. You did your homework and made your conviction investments. Study those companies and learn as much as you can about them and how markets work. Read the 10k’s. After a while you will find that there are companies you have more conviction in, and others that you could care less about. You may own both types. Then ditch the ones you don’t have conviction in, and double down on the ones you do. If you like Indexing and want to do that approach, do that too. I think everyone should own a few single company stocks so they can learn about investing, valuation, competition, products, strategies, and so on. You need to have some skin in the game to really learn. The bulk of your savings should be in funds, so that you achieve diversification. A simple total market index fund or SP500 fund is fine. Just focus on saving, and the investing will take care of itself.

I’m curious to hear thoughts on this old debate in light of Betterments recent fee changes – flattening from .35/.25/.15 on account balance to .25% across the board. I am pretty disappointed myself, but haven’t done the math just yet.

Hey MMM,
I enjoyed reading this post and look forward to reading more of your work. So, I wanted to get your advice for my situation. I have a Roth IRA through Thrivent Financial that I started fall/winter of 2015. From the little research I have done it sounds like their fees are too high. As a result, I am looking into moving it. So my questions are: 1. Should I move my Roth IRA to be managed by someone else? If so, what fees/penalties (if any) should I expect? And 2. If you think I should move it, where would you recommend a young investor transfer a Roth IRA to and why?
I am contributing $75/month at the current time. I could maybe bump it to $100/month if it helps cut down on fees significantly.
Thanks in advance for the insight!

Hey there, thanks for this, I was looking for a comprehensible comparison for long term investing. I understand and agree that over 20 – 30 years passive investing is the best way go, nearly no active investors would beat the market over that time span.
I have a question regarding short term investing though (2 – 5 years). What is the advice / way to go in trying to invest a percentage of your money that you will have to use 2 – 5 years down the line? Someone mentioned being able to beat the market for short term investment or over a single economic cycle. What’s a reliable way to attempt to do that, which doesn’t involve a massive time commitment on your part?

All this talk about fees for this, and fees for that. What about zero fees? As in M1 Finance? True, they do not ‘hold your hand’ but then the final decision of what to do is up to you anyway. Happy investing.

hi, Towards the beginning of the of the article you said that to improve on VTI you need to soak up a few more books. Is there a link on the most helpful books you would recommend. I’m 24. We Just wrote the last check for 34K of student loans, have 2 incomes, no kids and a low cost of living. We are sold on investing and ready to start. I’m still very torn on Investing directly with vanguard or going with betterment. Do you have any advice on how we should go about making our decision.

I am sorry to be dense but I have read this post several times over the past few years (I’m not sure why I didn’t comment before now). Could you spell out the bottom line for me? Do you recommend Vanguard or Betterment? If Vanguard, what fund? If Betterment, what allocation of stocks/bonds? I really want to just set my money and forget about it but right now it’s not doing anything. This question is answered on other blogs but I trust you.

I kind of feel more informed, but more lost then before I read this. It seems like everyone has a different opinion. I would like to invest on my own, but I like the thought of Betterment. It’s kind of hard to read on what you need to do when theres so many ways to go and thoughts on whats best…. Especially when nobody is going to be in the same situation or goals. I wish there was data on people using Vanguard themselves vs Betterment. What the average gain was and what was the extremes…. kind of a risk reward and consistency evaluation.

Thanks so much for the article! So in today’s market (2018) since everything is up so much (stock market wise) is it still wise to dump say $100,000 into Betterment right now? Or should I wait until the market eventually crashes to invest it?

Let me tell you why I just closed my Betterment account, transferring it to Vanguard.

I do a spreadsheet each month of all my accounts. Betterment routinely produces a Quarterly Statement. Each month when I don’t get an end of quarter statement, I either chat or email or call Betterment and request the “non-quarterly” statements, i.e. for Jan., Feb., Apr., May, Jul., Aug., Oct., and Nov. In the past this was never a problem. I would get the requested statement very quickly. When I requested the Aug. 2018 statement, I sent an email to support@betterment.com, as I’ve done numerous times in the past. I got no response. So I sent a second email – a third and a fourth email. Still no response. So I went on the website and found the direct phone line to Betterment support. I called. The answering machine put me on hold (with rather pleasant music, I must admit). However after some 20 or 30 minutes no one ever answered the line. I tried again with no success. So I went on the Vanguard site and got the paperwork for transferring an account to Vanguard. That’s my story. I was surprised but there’s only so much abuse I can take. Good luck to you all.

I realize this is an older post but it’s been updated recently and figure it’s worth a shot to see if I get any suggestions..

Last February I moved my Roth IRA to Betterment after they pointed that I was paying a lot of high fees with my previous company. Over the past 9 months I have not seen a positive return percentage more than maybe 3 times and I’m currently at a -6.2% since moving the account… I’ve been getting antsy and really starting to consider moving my account back to my original investment group.

Any suggestions? Should I wait it out to see if Betterment starts making money vs losing it or should I go ahead and cut my losses and move back?

Hi Sarah – the key with any investment (as long as you are buying index low-fee index funds as you are doing here) is to set it and forget it.

Betterment is just a nice front-end for buying the entire world of stock index funds, and those just happen to have declined over the past year. It’s not Betterment’s fault, just as Betterment deserves no credit when markets go up in value.

If you’re saving for retirement, you can celebrate these lower prices, because it means you are getting more shares for your money as you continue to buy more of them.

I’ve read The Simple Path to Wealth and am currently reading The Boglehead’s Guide to Investing. I have about 24K in a Roth with a brokerage firm through a family friend. I have about 14K worth of gains in that. I also inherited about 100K of separate equities (in another brokerage firm). I’ve had that for 15 years or more so the gains on that are large.

I like the idea of Vanguard, but I don’t know what I should do with my Roth? Life Strategy or Target Retirement Fund?

1. Are those IRA accounts? How does my Roth fit into that?
2. What if I don’t know when I want to retire? Can it be moved?
3. In these Lifestrategy and Target Retirement, are these funds or ETFs?
4. Does Vanguard offer some advice?
5. Bogleheads suggest your age be the percentage of your bonds in tax-advantaged. I am 43.
6. Does anyone know of anyone who can offer hourly fee advice that has this perspective or similar to Bogleheads?

Mr. Money Mustache, the $100k and each additional $10k investment that you put into Betterment were new money？ I have a large chunk of investment in Vanguard taxable account, and it seemed like I should just keep it there rather than move them to Betterment, correct?

M-1 Finance is the new Betterment. I stumbled upon this great new product by reading the investing and asset allocation advice on the Paul Merriman Foundation website.

M-1 provides all of the regular re-balancing that Betterment does without any of the cost. Here’s how it works:
– You pick an asset allocation “pie” (with each slice of the pie representing a different stock or ETF);
– You set up a regular contribution schedule (just like with Betterment)
– Each time there is more than $10 of cash in your M-1 account (by reason of contributions, dividends, etc.) M-1 automatically applies that cash towards purchase of new securities and the purchase of securities is weighted so that each purchase goes towards a natural re-balancing (e.g., if you are underweight VOO, it buys more VOO as compared to other securities in your “pie”)
– Here’s the big advantage: There is no AUM fee! $0 fee. (This can save you hundreds or thousands per year!)
– There are no commissions / trading fees (just like Betterment)

How does M-1 make money?
– M-1 does make money on short-term cash float (they only trade securities once a day at 10am)
– They also engage in securities lending (but honestly this is not anything that other robo’s or broker/dealers are not doing; TD Ameritrade makes gobs of money by lending securities to Citadel the giant Chicago-based hedge fund).

Any other notes?
– Also, you can pick ANY stock or ETF you want. For professionals who work in Big 4 accounting firms with significant independence restrictions, this is a HUGE plus because I found myself fighting with Betterment over not putting me into certain securities. I had to leave them because they were so inflexible and I was at risk of independence violations.
– No tax loss harvesting but for no fee, I’m okay with that. Plus TLH lowers your basis and if you ever have to sell you end up paying the piper. There are downsides. Especially if you find yourself in a higher tax bracket later on in life.

Hello! I’ve had my Traditional IRA with Betterment for several years and want to transfer to Vanguard. Quite frankly, I knew almost nothing about investing when I opened it so it seemed like a good choice. I now feel like a know a bit more than nothing and would like to go the tried and true route of something like 80-90% VTSX and the rest in bonds for the long-term since that will give me a respectable amount of international exposure. Currently, Betterment has me owning 44% of my portfolio of developed and emerging international markets and the rewards have yet to reveal themselves, but the risks seem, well, risky. Not to mention the higher fees that Betterment charge over Vanguard. Are you still invested with Betterment?

Hello M! You are close. “VTSMX” and “VTSAX” are the traditional fund versions of VTI. VTI is the exchange-traded fund version, which means you can buy and sell it with any stock brokerage account, including the Vanguard stock brokerage.

In the future, for faster answers, try typing things like this into Google or your search engine of choice: “VTI vs VTIAX”, and so on.

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